Mercury News editorial: State, federal government must continue to look for ways to heal housing market

Mercury News Editorial

Posted:
10/25/2011 08:00:00 PM PDT

It will probably help a little. That's about the best that can be said of the mortgage refinancing program announced Monday by the Obama administration. Sadly, that's been true of each of Obama's initiatives to heal the housing market.

The surest way to end the foreclosure crisis is for banks to reduce the principal balance for at least some of the 11 million or so borrowers who owe more than their homes are worth. So far, that plea has proved futile. But the fact that other programs have failed to live up to expectations isn't reason to abandon them.

Instead, state and federal authorities must keep looking for innovative ways to attack this complex problem, which is creating a massive drag on the economy. And they must tinker with existing programs, including this latest one, until the housing market begins to recover.

About 1 million homeowners may be eligible for the new program, which could save each hundreds of dollars a month by allowing them to refinance to a rate around 4 percent. Borrowers with government-backed loans that are massively underwater will be helped the most, since they had been ineligible to refinance. California, Nevada and Florida are the states hit hardest by the mortgage crisis and have the most to gain.

This could pump billions back into the economy and save the U.S. government a small amount, too.

Of course, that assumes the program works -- that homeowners will apply and that banks will follow through on their promises. Those are big assumptions.

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The Obama administration's two major efforts to help homeowners, the Home Affordable Refinance Program and the Home Affordable Modification Program, were supposed to aid up to 9 million families. So far, fewer than 1.6 million have gotten help, according to government reports.

The Hardest Hit Fund, launched last year, provided $7.6 billion to help borrowers in 18 states. As of March, it had spent just $11 million and helped only a few thousand people -- including, according to the Center for Public Integrity, 856 families in California, where more than 2 million homeowners are underwater.

Government regulators must do more to force banks to streamline their practices so that more people can be helped.

Lenders should be required to send letters to every eligible homeowner explaining how to apply for this new program. A few months in, regulators must assess and adjust the rules to ensure everyone who is eligible actually applies.

States must do their part, too, even when the payoff might seem small.

California's Housing Finance Agency, for example, is reportedly foreclosing on some loans it financed because the owners rented out the property in violation of the loan terms.

These families are technically in default, but they are also victims of this crisis, stuck in homes that no longer work for their growing families. So they've rented out their properties and moved elsewhere while continuing to pay the mortgage. CalHFA should abandon these unnecessary foreclosures.

And federal and state officials must continue searching for solutions to the mortgage crisis. The economy won't recover without them.